Peabody's Earnings Generate Some Electricity

What it means when a $1 billion loss can spark a little rally.

Major coal miner Peabody Energy(NYSE:BTU) generated some welcome energy within the industry Tuesday, even after releasing a mixed bag of tepid profitability and unfortunate asset impairments.

Peabody suffered an adjusted loss from continuing operations of $1.12 per share for the fourth quarter of 2012, excluding the additional pain of asset impairments and mine closure costs totaling another $2.61 per share. The non-adjusted loss of $1 billion for the quarter is dominated by writedowns on Australian assets, including a 7% impairment upon assets acquired in the company's landmark Macarthur Coal transaction in 2011. That's a smaller hit on a percentage basis than the 20% impairment that Cliffs Natural Resources(NYSE:CLF)revealed last week on its own major 2011 acquisition, but it's always a tough pill to swallow when huge purchases turn partially sour that quickly. Peabody expects the first quarter of 2013, furthermore, to yield a loss of anywhere between $0.04 per share and $0.26 per share.

That these sorts of developments appear to have sparked a small rally among the group strikes me as a sign of the times; a reflection of the sheer scale of trailing decimation of coal mining share valuations as U.S. coal demand, seaborne metallurgical coal prices, and Chinese growth all took a simultaneous thrashing during 2012. Potentially key to the 6% surge in Peabody's shares Tuesday, then, is the company's well-reasoned assessment that the worst market conditions to strike the industry in recent memory may have struck a bottom late last year. Accordingly, Arch Coal(NYSE:ACI) enjoyed a 5% bump of its own, while less-favorably positioned competitor Alpha Natural Resources(NYSE:ANR) rose less than 3% intraday.

In a nutshell, Peabody finds reassuring confirmation of a soft landing for China -- the all-important linchpin of global coal demand -- in that nation's fourth-quarter improvement to reach 8% GDP growth and a two-year high for relevant industrial indicators. Chinese steel production surged 9% in the fourth quarter, delivering substantial stabilization to the heavily impaired price environment for seaborne metallurgical coal. The demand outlook for seaborne thermal coal is bolstered by an uncommonly cold winter in China, critically low stockpiles in India, and a resiliently bullish outlook for 450 megawatts of new coal-fired generation capacity to be installed worldwide over the next five years (requiring 1.6 billion tons of incremental coal supply to operate at capacity).

Persistently bullish long-term outlooks for global coal demand encouraged me to double down on Peabody Energy near $20 per share last July; and with the stock now trading some 33% higher, I'm very glad I did. Importantly, higher natural gas prices in the U.S. are finally turning the tide on the fuel-switching dynamic, "making natural gas uncompetitive with Powder River Basin coals for most U.S. electricity generation," according to Peabody.